With reference to Convertible Bonds, consider the following statements: 1. As there is an option to exchange the bond for equity, Convertible Bonds pay a lower rate of interest. 2. The option to convert to equity affords the bondholder a degree of indexation to rising consumer prices. Which of the statements given above is/are correct?

The snippet explicitly states the proposition as a textbook exam statement: 'As there is an option to exchange the bond for equity, Convertible Bonds pay a lower rate of interest.'

A student could treat this as a stated principle and then check market examples or compare issuer coupon schedules to test if convertible issues indeed show lower coupons than plain debt from same issuer.

Explains instruments that convert into equity (convertible debentures, warrants) and highlights that conversion is a right/feature tied to debt instruments.

Knowing conversion is a built-in equity option, a student can reason that such an option has value to holders and therefore may allow issuers to offer lower interest—so they could compare option value to coupon differential.

Describes how bond yields and prices reflect expected returns relative to alternatives, showing bond coupon/yield trade-offs matter in pricing.

Combine this pricing rule with the conversion feature's value: if conversion adds expected upside, required coupon (and yield) could be lower for equivalently priced convertible bonds.

Defines different bond types (fixed vs floating vs indexed), indicating bonds' coupon structure varies with attached features.

A student can generalize that additional bond features (like convertibility) are part of bond design that influence coupon levels and can compare feature-rich bonds to plain fixed-rate bonds.

Notes that bonds give fixed returns and that fixed-income holders bear certain risks (e.g., inflation), underlining that bond returns are adjusted for risk/benefit trade-offs.

A student could infer that because convertibility provides potential equity upside (mitigating some fixed-return disadvantages), issuers might compensate by offering lower fixed coupons.

Contains the exact contested claim as an examinable proposition — i.e., that the conversion option 'affords the bondholder a degree of indexation to rising consumer prices'.

A student could treat this as the proposition to test against definitions of inflation protection and compare convertible bonds to explicit inflation‑linked instruments.

Gives a clear rule/definition of 'inflation indexed bonds': both principal and interest are protected and linked to an inflation index like CPI/WPI.

One can extend this by comparing the mechanically guaranteed indexation of IIBs to the discretionary/market‑driven payoff of a conversion option to see if convertible bonds give comparable automatic inflation protection.

Explains that inflation‑protected bonds (IIBs/CIBs) explicitly protect principal and/or interest — an explicit example of how inflation protection is implemented.

A student could contrast the contractual mechanics of IIBs (indexation formulas) with the conversion feature (equity option) to judge whether the latter is a formal inflation hedge.

States the general effect that inflation hurts fixed‑rate bondholders because bonds give fixed returns while rising prices erode real value.

Using this general rule, a student can reason that any bond feature claimed to provide 'indexation' must offset this erosion; they can then check whether conversion to equity would plausibly restore real value under typical inflation scenarios.